INDEX

SR. NO. DESCRIPTION

1 OVERVIEW OF HOTEL OCCUPANCY TAX

2 TAX LAW AND POLICY

3 TAXPAYER RECORDS

4 AUDIT PROCEDURES

5 AUDIT WRITE-UP

REFERENCE
 CHAPTER 1
OVERVIEW OF HOTEL OCCUPANCY TAX

INTRODUCTION
This procedure manual has been written as a training tool and
reference guide for the auditor. Basic audit procedures and
techniques are outlined in the Auditing Fundamentals Manual.
This manual is applicable to Hotel Occupancy Tax Audits. Audit
procedures and related characteristics unique to the hotel
industry are covered in this manual. The purpose of this manual is
to present suggested audit procedures that conform to standard
audit practices.

Users of this manual are responsible for insuring that any statute
or procedural changes that occur after the published date of this
manual are taken into consideration. Taxpayers and any other
users of this manual should review applicable statutes and rules
and any changes that have been made to the rules or statutes. A
good source of information is the Comptroller's hotel occupancy
receipts files located on the "Hotel Tax" Web page on the
Comptroller's Window on State Government website.

Updated overnight, hotel receipts are listed monthly and quarterly

by city and include taxpayer numbers, addresses, capacity, and
reported receipt amounts. Monthly and quarterly hotel receipt
data for the state is also available by downloading compressed
files, but are only current as of the date listed.

Audit Period

The Hotel Occupancy Tax has a four-year statute of limitations. A

taxpayer may sign a waiver to extend the statute period. Refer to
the Auditing Fundamentals Manual for instructions to complete
the form "Agreement to Extend Period of Limitation."

For audits of entities that include tax collected not remitted or

audited taxes that are in excess of 25% of reported amounts - the
audit period may cover more than four years. This is due to an
exception in the statute. Audit periods in excess of four years
must be pre-approved by Audit's designated headquarter
personnel.

Certificate of No Tax Due

A certificate of no tax due may be requested by either the seller

or the purchaser of a business. A certificate stating the amount
due or that no tax is due may be obtained from the State in the
following manner. The seller, the seller's assignee, or purchaser
must make a written request to the Comptroller of Public Accounts
for the certificate before the sale of the business is completed.
The Comptroller must issue a certificate to the requestor within
60 days after the records are made available by the seller for
audit or within 60 days after receiving the written request for the
certificate, whichever period expires later, but in any event not
later than 90 days after receiving the written request. If any
amount is found to be due, it must be paid before the certificate
will be issued. Failure of the Comptroller to timely issue the
certificate to the requestor will release the purchaser from any
further obligation to withhold an amount from the purchase price
(for taxes).

If a certificate of no tax due is not obtained by the purchaser of a

business, the purchaser may be held liable for any taxes (hotel
occupancy tax, sales taxes and other taxes or fees) not reported
by the previous owner. For more information on a purchaser's
potential tax liability, refer to Comptroller Rule 3.7 of the General
Rules - "Successor Liability: Liability Incurred by Purchase of a
Business."
A Certificate of No Tax Due audit is a Priority Assignment. The
audit and write-up procedures are the same as those for a
deficiency/credit or No Tax Change audit. The Processing Center
must be notified by comments entered on Work Manager that the
assignment is a priority and marked as a Certificate of No Tax Due
audit assignment and the audit package should be expedited.
This is extremely important as the State may lose revenue if the
audit is not processed timely.

Hotel Managing Companies

A managing company is one which manages many hotels. These

managing companies do not own the hotels but are responsible
for reporting the hotel occupancy tax. TEX. TAX CODE ANN.
156.053 provides that "A person owning, operating, managing, or
controlling a hotel shall collect for the state the tax ...." Therefore,
if a managing company is responsible for reporting the hotel
occupancy tax, then the audit will be conducted on the managing
company. In these cases, the managing company, per the statute,
would be liable for the audit deficiency.

When conducting an audit the auditor may be dealing with a

managing company that manages hotels in several different
cities. It is important to determine the location of the records that
will need to be examined during the course of an audit. Usually
the detail records will be located at the outlet location. Pre-audit
research should involve determining the type of records available
(i.e., computer system utilized - whether data is available on CD,
diskette, in a data format that is accessible by the auditor), also
the records location, authorized contacts and their office location,
auditor workspace available etc. All these topics should be
discussed during the planning stages of the audit fieldwork.

Sales Tax for Hotels

When auditing for hotel occupancy tax the auditor should

simultaneously generate and conduct an audit for sales and use
tax. The same records used in the hotel audit will also need to be
examined for a sales tax audit. This will alleviate the taxpayer the
inconvenience of having the same records and personnel involved
on two separate occasions for two separate audits. Hotels may
summarize their daily receipts/revenues using the same data
format or spreadsheet. If so, the reconciliation of taxes and
revenues for both sales tax audit and the hotel tax audit may
utilize the same data bases and data files.

If the hotel is not permitted for sales tax, the auditor should
determine if the entity makes taxable sales - it may be
determined that the entity should be collecting and reporting
sales and use tax. If this is the case, the hotel owner or
management will be required to obtain a sales tax permit to
report these amounts. The taxpayer has the option to go to the
nearest Comptroller of Public Accounts Enforcement Office and
obtain a permit on the premises immediately. If this is not
feasible, the auditor should deliver an application for a sales tax
permit to the taxpayer and then arrange to have the application
processed as soon as possible. If the taxpayer refuses to obtain a
sales tax permit, the auditor will permit the taxpayer on the
system. This is necessary to process the sales tax audit.

Hotels may summarize most of their daily receipts/revenues on

the same data format or spreadsheet. Some types of revenue that
the hotel may have are: restaurant sales, parking revenue, valet
services, laundry services, vending machine sales, magazines or
miscellaneous type sales, and payphone or telephone charges.

In addition to the examination of sales and revenues, the sales

and use tax audit will encompass the examination of purchases of
both assets and expenses as well as purchases of services made
for the hotel's own use. These items may include the following
items: furniture, televisions, computers, equipment, office
supplies, leasehold improvements and taxable services such as
parking, landscaping, etc.
Purchases of items provided for use by the hotel guest are also
examined as these items are normally subject to sales tax. These
purchases may include, but are not limited to, soaps,
toothbrushes, toiletries, towels, and other items used by the
guest. In-room amenities provided with the guest room: shampoo,
soap, toilet paper, laundry bag, hair net, etc. are taxable to the
hotel at the time of purchase. If a separate charge is made to the
hotel guest for the purchase of these items, the item may be
purchased tax-free by the issuance of a resale certificate. Sales
tax would be charged to the occupant when the item is resold.

Kitchen equipment for use in the hotel's restaurant (used to cook,

mix, chop, or blend food or beverages) that qualifies as
manufacturing equipment may be purchased tax-free with the
issuance of an exemption certificate. See Rule 3.300(d).

DEFINITION OF 'AUDIT'

The general definition of an audit is a planned and documented activity performed

by qualified personnel to determine by investigation, examination, or evaluation of
objective evidence, the adequacy and compliance with established procedures, or
applicable documents, and the effectiveness of implementation. The term may
refer to audits in accounting, internal controls, quality management, project
management, water management, and energy conservation.
Auditing is defined as a systematic and independent examination of data,
statements, records, operations and performances (financial or otherwise) of an
enterprise for a stated purpose. In any auditing the auditor perceives and recognizes
the propositions before him for examination, collects evidence, evaluates the same
and on this basis formulates his judgment which is communicated through his audit
report. The purpose is then to give an opinion on the adequacy of controls
(financial and otherwise) within an environment they audit, to evaluate and
improve the effectiveness of risk management, control, and governance processes.

The definition for Audit and Assurance Standard AAS-1 by the Institute of
Chartered Accountants of India (ICAI): Auditing is defined as a systematic and
independent examination of data, statements, records, operations and performance
(financial or otherwise) of an enterprise for a stated purpose. In any auditing
situation, the auditor perceives and recognises the proposition before him for
examination, collects evidence, evaluates the same and on this basis formulates a
judgment which is communicated through an audit report. An audit is an
independent examination of financial information of an entity, irrespective of its
size and form, when such examination is conducted with a view of expressing an
opinion thereon.

1. An unbiased examination and evaluation of the financial

statements of an organization. It can be done internally (by
employees of the organization) or externally (by an outside firm).

2. An IRS examination of a taxpayer's return or other transactions.

The IRS performs this examination to verify the accuracy of these
filings.

OBJECTIVES OF AUDIT

Basic objective of auditing is to prove true and fairness of results presented by

profit and loss account and financial position presented by balance sheet. Its
objectives are classified into two groups which are given below:

A. Primary Objectives Of Audit

The main objectives of audit are known as primary objectives of audit. They are as
follows:

Examining the system of internal check.

Checking arithmetical accuracy of books of accounts, verifying posting,
costing, balancing etc.
Verifying the authenticity and validity of transactions.
Checking the proper distinction of capital and revenue nature of transactions.
Confirming the existence and value of assets and liabilities.
Verifying whether all the statutory requirements are fulfilled or not.
Proving true and fairness of operating results presented by income statement
and financial position presented by balance sheet.

B. Subsidiary Objectives Of Audit

These are such objectives which are set up to help in attaining primary objectives.
They are as follows:

i. Detection and prevention of errors

Errors are those mistakes which are committed due to carelessness or negligence or
lack of knowledge or without having vested interest. Errors may be committed
without or with any vested interest. So, they are to be checked carefully. Errors are
of various types. Some of them are:

Errors of principle
Errors of omission
Errors of commission
Compensating errors

ii. Detection and prevention of frauds

Frauds are those mistakes which are committed knowingly with some vested
interest on the direction of top level management. Management commits frauds to
deceive tax, to show the effectiveness of management, to get more commission, to
sell share in the market or to maintain market price of share etc. Detection of fraud
is the main job of an auditor. Such frauds are as follows:
 Misappropriation of cash
Misappropriation of goods
Manipulation of accounts or falsification of accounts without any
misappropriation

iii. Under or over valuation of stock

Normally such frauds are committed by the top level executives of the business.
So, the explanation given to the auditor also remains false. So, an auditor should
detect such frauds using skill, knowledge and facts.

iv. Other objectives

To provide information to income tax authority.

To satisfy the provision of company Act.
To have moral effect

POWERS AND DUTIES OF AUDITORS

Every Auditor of a company shall have a right of access at all times to the
books and accounts and vouchers of the company, whether kept at the head
office of the company or elsewhere, and shall be entitled to require from the
officers of the company such information and explanations as the auditor
 may think necessary for the performance of his duties as auditor. Without
prejudice to the provisions of sub-section (1), the auditor shall inquire:

(a) Whether loans and advances made by the company on the basis of
security have been properly secured and whether the terms on which
they have been made are not prejudicial to the interests of the
company or its members.

(b) Whether transactions of the company which are represented

merely by book entries are not prejudicial to the interests of the
company.

(c) Where the company is not an investment company within the

meaning of Section 372 or a banking company, whether so much of
the assets of the company as consist of shares, debentures and other
securities have been sold at a price less than that at which they were
purchased by the company.

(d) Whether loans and advances made by the company have been
shown as deposits.

In the case of the balance-sheet, of the state of the company's affairs as at

the end of its financial year and
In the case of the profit and loss account, of the profit or loss for its
financial year.
The auditor's report shall also state :

(a) Whether he has obtained all the information and explanations

which to the best of his knowledge and belief were necessary for the
purposes of his audit.

(b) Whether, in his opinion, proper books of account as required by

law have been kept by the company so far as appears from his
examination of those books, and proper returns adequate for the
purposes of his audit have been received from branches not visited by
him.
 Provided that before making any such order the Central Government
may consult the Institute of Chartered Accountants of India
constituted under the Chartered Accountants Act, 1949, in regard to
the class or description of companies and other ancillary matters
proposed to be specified therein unless the Government decided that
such consultation is not necessary or expedient in the circumstances of
the case.

The accounts of a company shall not be deemed as not having been, and the
auditor's report shall not state that those accounts have not been, properly
drawn up on the ground merely that the company has not disclosed certain
matters if :

(a) those matters are such as the company is not required to disclose
by virtue of any provisions contained in this or any other Act, and

(b) those provisions are specified in the balance sheet and profit and
loss account of the company.

GENERAL CONSIDERATION FOR AUDIT OF A HOTEL

The general considerations for audit of a hotel are:

Study the constitution. That is, whether it is a public or a

private limited company. (certain income-tax benefits to the
 hotel establishments are available only if it is a public limited
company.)

Examine if the hotel is affiliated to any chain of hotels,

whether national or international.

Read the terms of affiliation and ensure compliance. These

hotels may be awarded star status depending on the
facilities provided.

Ensure that the facilities are provided as per the star

category requirement. (Often an auditor is asked to issue a
certificate to this effect.)

Examine if the hotel has a reciprocal arrangement with

another hotel. Understand the significant accounting and
other policies of the hotel, especially with reference to
checkout time of the guests, discount structure, corporate
clientele benefits, appropriation and allocation of overheads
into various departments or profit centres, and so on.

Understand the various profit centres identified by the hotel,

such as coffee shop, bar, restaurant, conference halls,
banquets, outside catering, and so on.

Study the internal control procedures of the hotel with

particular reference to

purchase of edibles, stores and kitchen,

consumables such as soaps, shampoos, guest toiletries,

occupancy of rooms of the hotel, and so on.

 Carry out audit of profit centres independently and confirm
the profit or loss at each profit centre coffee shop,
restaurant, or bar.

Examine the internal control procedures for taking orders,

serving food and collection of bills.

Examine internal control for serving the food with reference

to quantity or quality. Income from this centre would be sale
of food, liquor, and so on.

Check the internal control systems for recording the sales.

Test-check the bills and their entry. Match the direct
expenditure on this centre consisting of consumption of
edibles, condiments, provisions, vegetables, non-vegetarian
items, and so on, and salaries of, among others, the serving
staff, cooks, waiters, cleaners, stewards and cashier.

Arrive at the gross profit for the profit centre and analyse the
same with that of the industry as well as figures of the
previous year to satisfy about the reliability.

Check the charging of overheads such as depreciation of

furniture, kitchen equipment, and so on, to this profit centre.

Guest rooms:

a) Understand the classification of guestrooms as air-conditioned,

non air-conditioned, suites, and so on.

b) Study the internal control procedures for registration of guests,

recording of checking in time, checking out time, number of
persons, adults, children, and so on. It is possible in the case of
guest rooms to have a revenue more than hundred per cent of
installed capacity as guests are charged for a full day even if the
room is occupied for a part of a day. If a guest, for instance,
occupies a room in the evening and checks out early next
morning, the same room may be allotted to another guest
immediately. Both the guests will be charged full day's tariff.

c) Study the internal control for serving food to the guests inside
the rooms.

d) Apportionment of food expenditure to the guestrooms is

normally made, depending upon the management policies of the
hotel.

e) Study procedures of the hotel for collection through credit

cards.

f) Vouch expenditure and income related to guestrooms. Direct

expenditure would be salaries of room service boys, upkeep and
maintenance of guestrooms, depreciation on furniture in
guestrooms, washing and cleaning of linen, cost of air
conditioning, and so on. Allocation of indirect expenditure such as
salaries of receptionists, telephone operators, housekeeping
department, and so on, should be done on a consistent basis as
per management policies.

Conference halls, banquets, and so on:

Evaluate the internal control systems for booking of conference

hall. Examine the authority for allowing of discounts and
concessions for booking of conference hall.

Income from conference hall would be booking charges in

general. Cancellation charges of the conference hall also form a
substantial income of a hotel. Examine the procedure for refund
of booking charges and ensure that a competent person
authorises the refund.
Direct expenditure on a conference hall shall be the public
address systems, salaries of sound technicians, electricians, and
so on.

Electricity charges, depreciation on equipment and furniture

should be directly charged off to the conference hall.

Other points:

Hotels also operate certain smaller facilities such as conversion of

foreign exchange, travel desk, shopping area, Beauty parlours,
gym, swimming pools, and so on. Study the arrangement with the
hotel for profit sharing and internal controls.

Hotels organise food festivals. See if a separate account is

maintained for such special events and surplus is transferred to
the general profit and loss account. Surplus arising out of different
profit centres should be transferred to the general income and
expenditure account.

Depreciation on utility buildings, general furniture, interest on

loans, debentures and auditor's fees should be charged off to the
general revenue account to arrive at the net profit or loss.

Hotels are long gestation projects and, therefore, payment of

interest out of capital is permissible for these projects. In such a
case, ensure that the requirements of Section 208 are complied
with.

Particular attention is to be paid to the assets of the hotel, such as

kitchen equipment, air-conditioning plants, sound systems,
cutlery and crockery, linen, and so on. Section 227 (4) (A) requires
the auditor to state whether there is a system of periodic
verification of fixed assets and the treatment of material
deviations observed during the course of such verifications.
Obtain management representation for the verification of
miscellaneous assets such as cutlery and crockery.

Hotels periodically discard the furniture and cutlery. Examine the

policy of the hotel and internal controls for such transactions.

CHAPTER 2

TAX LAW AND POLICY

INTRODUCTION

The Hotel Occupancy Tax law is covered in TEX. TAX CODE ANN. Chapter 156.

A hotel is any building in which members of the public obtain sleeping

accommodations for consideration of $15.00 or more per day ($2.00 minimum for
local taxes) effective October 1, 2003. Prior to that date the $2.00 or more charge
applied to both state and local tax.
The term hotel includes:

Hotels
Motels
Lodging houses
Inns
Rooming houses
Tourist homes, houses or courts
Bed & breakfast
Beach House
Manufactured homes
Skid mounted bunk houses
Cabins
Cottages
Condominiums
Rental Houses - Houses rented for less than 30 days
Other buildings where sleeping rooms are furnished in return for payment
of money

NOTE: Apartments, condominiums, and rent houses are not normally subject to
hotel tax because they are usually rented for more than 30 days. When these are
rented to a transient clientele they will be subject to hotel tax if they are occupied
for less than 30 days. Refer to the Permanent Resident section of this manual.

The definition of a hotel does not include:

Hospitals
Sanitariums
Nursing homes
Dormitory or other housing facility owned or leased and operated by an
institution of higher education
 Apartment buildings which only lease to permanent residents (occupancy
for at least 30 consecutive days) do not meet the definition of a hotel and their
rental is not subject to hotel tax.

Tax Rates

State Taxes

Since September 1, 1987, the State rate has been 6% of the price paid for a room in
a hotel. (See TEX. TAX CODE ANN. 156.052)

Sept 01, 1987 through today = 6%

Oct. 02, 1984 through Aug. 31, 1987 = 4%

Prior to Oct. 02, 1984 = 3%

Local Taxes
Statute CHAPTER 351. MUNICIPAL HOTEL
References: OCCUPANCY TAXES

CHAPTER 352. COUNTY HOTEL OCCUPANCY

TAXES

CHAPTER 334. SPORTS AND COMMUNITY

VENUES

The total rate charged by a hotel may include additional local hotel taxes.
Additional rates are due to the following governmental authorities that may levy an
additional hotel occupancy tax based upon the cost of rooms ordinarily used for
sleeping.

Municipalities may levy a tax rate not to exceed 7% , except:

Certain eligible central municipalities - may not exceed 9%:
Municipalities boarding the Gulf of Mexico with a population
of more than 250,000 (effective June 18, 1999); and
 Municipalities with a population of less than 5,000 adjacent
to a home-rule city with a population of less than 80,000 (effective
September 1, 2003)
General law municipalities bordering the Gulf of Mexico that have a
boundary within 30 miles of Mexico - may not exceed 7.5% (effective June
18, 2003; expires January 1, 2006)
Counties - rates vary according to population size of the county, whether
there is a municipality within the county and whether the county borders on
the Gulf of Mexico.
Sports or community venue districts may levy a tax rate not to exceed 2%.
Effective March 28, 2003, counties with a population of more than two
million adjacent to a county with a population of more than one million may
levy a tax rate not to exceed 3%.

MUNICIPAL HOTEL OCCUPANCY TAXES

Municipalities may impose, by ordinance, a hotel occupancy tax on the rental of a

room in a hotel that costs $2 or more per day and is ordinarily used for sleeping.
Municipal hotel tax, therefore, is not due on the rental of meeting or banquet
rooms. See Tax Code Section 351.002.

351.003. Tax Rates

(a) Except as provided by this section, the tax authorized by this

chapter may be imposed at any rate not to exceed seven percent
of the price paid for a room in a hotel.

(b) The rate in an eligible central municipality may not exceed nine
percent of the price paid for a room. This subsection does not
apply to a municipality to which Section 351.106 applies.

(c) The rate in a municipality that borders on the Gulf of Mexico and
has a population of more than 250,000 or in a municipality with a
 population of less than 5,000 adjacent to a home-rule city with a
population of less than 80,000 may not exceed nine percent of
the price paid for a room.

Text of subsection (d) is effective until January 1, 2006.

(d) A general-law municipality that borders on the Gulf of Mexico

and has a boundary that is within 30 miles of Mexico may by
ordinance increase the rate of the tax under Subsection (a) to a
maximum rate of 7.5 percent if the increase is approved by a
majority of the registered voters of the municipality voting at an
election held for that purpose.

Authorized uses of municipal hotel tax revenue are provided in the Tax Code
Sections 351.101 through 1075. Links to this chapter may be found under the
heading "Local Hotel Taxes" on the "Hotel Tax" page of the Comptroller's website.

COUNTY HOTEL OCCUPANCY TAXES

352.003. Tax Rates

The commissioner's courts of certain counties are authorized to impose, by order or

resolution, a hotel occupancy tax on a hotel room that costs $2 or more per day and
is ordinarily used for sleeping. County hotel tax, therefore, is not due on the rental
of meeting or banquet rooms. See Tax Code Section 352.002.

(a) Except as provided by this section the tax authorized by this

chapter may be imposed at any rate not to exceed seven percent
of the price paid for a room in a hotel or, until January 1, 2001,
eight percent of the price paid for a room in a hotel in a county
with a population of more than 3.3 million.

(b) The county tax rate in a municipality that has a population of 1.9
million or more may not exceed two percent of the price paid for
 a room in a hotel.

(c) The rate in a county that does not have a municipality may not
exceed four percent of the price paid for a room in a hotel.

(d) The tax rate in a county authorized to impose the tax under
Section 352.002(a) (12) may not exceed three percent of the price
paid for a room in a hotel.

(e) The tax rate in a county authorized to impose the tax under
Section 352.002(a)(6) and that has a population of less than
40,000 and adjoins the most populous county in this state may
not exceed three percent of the price paid for a room in a hotel.

(f) The tax rate in a county that borders the Gulf of Mexico, has a
population of more than 200,000, and borders the Neches River
may not exceed two percent of the price paid for a room in a
hotel in the county.

(g) The tax rate in a county that is authorized to impose the tax under
Section 352.002(a)(17) may not exceed two percent of the price
paid for a room in a hotel.

Authorized uses of county hotel tax revenue are provided in the Tax Code Section
352.108. Links to this chapter may be found under the heading "Local Hotel
Taxes" on the "Hotel Tax" page of the Comptroller's website.

Tax Rate

Except as provided by Subsection C, the

(a) Tax authorized by this subchapter may be imposed by a

 municipality or county at any rate not to exceed two percent of
the price paid for a room in a hotel.

(b) The ballot proposition at the election held to adopt the tax must
specify the maximum rate of the tax to be adopted.

(c) A county with a population of more than two million that is

adjacent to a county with a population of more than one million
may impose the tax authorized by this subchapter at any rate not
to exceed three percent of the price paid for a room in a hotel.

Another statute, Local Government Code Section 334.256, from the, requires that
when a hotel collects a sports and community venue tax, each hotel bill or receipt
must include a statement that lists the entities that impose hotel taxes and their
rates. See below for current and prior law.

Charges for Personal Services

Charges for personal services (which are unrelated to the cost of the actual
occupancy of the room) or charges to use a telephone are not subject to the hotel
occupancy tax if they are separately stated. This includes charges for room service,
messenger service, and valet service. If the charge represents an amount that would
be subject to sales tax on a stand alone basis (and the charges are separately stated)
then they are subject to sales tax. In these instances the hotel should obtain a sales
and use tax permit and charge and collect the appropriate taxes.

Question: A hotel collects a separate charge for a shuttle service to and from an
airport. The charge is a separate line item on the guest folio identified as 'Airport
Charge'. The room card key folder informs each guest that this amount will be
deducted if they do not use the shuttle service. Would this separate shuttle service
charge be subject to the hotel occupancy tax? Would it be subject to the limited
sales and use tax?
Answer: A separately stated charge for items or services not directly related to
occupying or cleaning and readying a room or space in a hotel for occupancy is not
subject to the state hotel occupancy tax. The separately stated shuttle service
charge is not subject to hotel occupancy tax because it is personal service and not
related to occupying a room. The shuttle service charge is also not subject to the
limited sales and use tax.

Items Not Subject To Hotel Occupancy Tax (when separately

stated)

Messenger service
Room service
Valet service (Personal services)
Use of a telephone (This is subject to telecommunications tax)
Baby sitting service
Shuttle service

Charges That Are Subject to Hotel Occupancy Tax

Some other charges that, when connected with the actual occupancy of the room,
are subject to the Hotel Occupancy Tax whether or not they are separately stated.
Such charges include but are not limited to:

Equipment rentals - Use of a television, rental of audio visual equipment

o When a separately stated charge is provided with a banquet room
rental charge and the hotel is the caterer - the rental charge is subject to the
limited sales and use tax [Rule 3.293(f)(5)]
o When provided in conjunction with the rental of a banquet or
meeting room and the hotel is not the caterer - the rental charge is subject
to state (but not local) hotel tax [Rule 3.162(a)]
Additional bed or cot charge or rollaway rentals
Pet Charges
 Pet Cleaning Charges
Reservation Fees
In-room safe rental charges
Microwave and refrigerator rentals
Energy Charge - A separate charge for energy that is directly related to the
occupancy of the room

An example of equipment rental could be as follows. The fitness equipment is

furnished in connection with the occupancy of the room would be subject to Hotel
Occupancy tax. All charges for items or services, other than personal services or
charges for the use of a telephone, which are furnished in connection with the
actual occupancy of a hotel room are subject to hotel occupancy tax, whether
separately stated or not. Rule 3.162(a) (2). Like a rollaway bed, television,
microwave, or other room furnishing, hotel tax should be collected on a charge for
fitness equipment in a hotel occupant's room. Hotels would then owe sales taxes to
suppliers on the purchase or rental of this equipment.

A charge for the use of fitness equipment not located in the occupant's room, is a
charge for an amusement service and would be subject to the limited sales and use
tax. An example would be a separately stated charge for the use of an off-premises
exercise room.

Charges that are Subject to Sales and Use Tax

Mandatory gratuities on food and beverages not distributed to qualifying

employees (Rule 3.337). However, if mandatory gratuities are based on sale or
service of alcoholic beverages, the charges are subject to the mixed beverage
gross receipts tax when the hotel has a mixed beverage permit (Rule 3.1001).
Room Service - Charges for ready to eat food are subject to sales taxes.
Rule 3.293(b) Charges for alcoholic beverages are subject to mixed beverage
tax or sales taxes depending on the TABC permit held. Rule 3.1001(c).
Delivery Charges - For sales tax, delivery charges associated with the sale
of a taxable item (e.g., food) are taxable. Rule 3.303(a). For mixed beverage
 tax, delivery charges associated with the sale or service of alcoholic beverages
are taxable mixed beverage receipts. Rule 3.1001(c).
Phone Charges - Fax and phone charges are taxable telecommunication
services and are subject to sales tax. The hotel is also responsible for the
Telecommunication Infrastructure Fund assessment on its receipts from
charges for taxable phone calls and faxes.
Fax transmittal service - This represents a taxable telecommunications
charge. The charge to send a fax is subject to Telecommunications
Infrastructure tax - the charge to receive a fax is taxable if the transmission
originates in Texas. If the hotel does not retain the documentation to show the
origination of the fax - then the hotel should charge tax for the receipt of faxes.
Swim/athletic club fees
Parking fees including Valet Parking Service
Charges to store a motor vehicle
Charges for movies - The rental of a movie in a hotel room is not subject to
hotel occupancy taxes. Movie rentals are subject to limited sales and use taxes.
The hotel should collect sales taxes on separately stated charges for movies,
whether provided on video cassette, DVD, or transmitted electronically.
Charges for internet access - Internet access services are subject to sales tax.
The first $25 of the monthly fee is exempt. Because hotels often cannot track
charges per guest, they may charge and collect tax on all services. See Rule
3.366(b). The internet charges that do not exceed $25.00 would not be subject
to tax - records must be retained to support these charges. If the internet
charges are purchased tax-free from the Internet Service Provider, there may
also be tax due on the taxable use of these services by the hotel/management
company employees.
Rental/access charge for video games
Sales of toiletries
Personal shopper charges for items that are subject to sales tax (as well as
the sales price of the items) would be taxable. If the items are not subject to
sales tax (such as groceries) the personal shopper charges would not be subject
to tax. If the charge for these items represent a dollar for dollar reimbursements
 of their cost - the items would not be subject to sales tax again when resold
(reimbursed by the customer).

(Refer to Hotel Occupancy Tax Rule 3.162.

Package Deals

If a hotel includes meals, drinks, admission to tourist attractions, or any other

unrelated benefit in the charge for lodging, the hotel occupancy tax must be paid
on the total charge. In order to be deducted from the amount subject to hotel
occupancy tax, these charges must be separately stated on the bill to the customer.
These separately stated charges might be subject to the limited sales and use tax or
the mixed beverage tax.

Banquet and Meeting Room Charges

The Hotel Occupancy Tax is due on the rental of meeting and banquet rooms if the
room is located in the same building (under the same roof) as the rooms with
sleeping accommodations. Hotel tax is not due on charges imposed on buildings
owned by a hotel which are physically separate from the hotel and which are not
used for the purpose of providing sleeping accommodations. (Refer to Hotel
Occupancy Tax Rule 3.162)

State hotel occupancy tax is due on lump-sum charges that include a banquet or
meeting room, food and equipment. Local taxes (city, county, and sports and
community venues) are not due on banquet or meeting room charges - only the
state tax is due.

When a hotel serves food, the hotel is considered a food service operator and
should charge sales taxes on the entire charge for food preparation and service,
including items used by the customer (e.g., tables, decorations, equipment). See
Rule 3.293(f).

When food is not provided, and the banquet room is located in the hotel (building
with sleeping rooms), the 6% state (not local) hotel tax is due on charges for all
items furnished with the room, other than charges for the use of a telephone or for
personal services. Personal services do not include cleaning and readying a room
for occupancy. See Rule 3.162(a).

Sales taxes are due on separately stated charges for equipment provided by the
hotels in connection with a catered event. If the hotel is not providing food,
equipment charges such as audio visual equipment, whether lump sum or
separated, are subject to state hotel occupancy tax when provided with the rental of
a room subject to hotel tax.

When the hotel has a mixed beverage permit, the 14% mixed beverage gross
receipts tax is due on the total amount received from the preparation, sale, or
service of alcoholic beverages, including ice and nonalcoholic beverages sold to be
mixed and consumed on the premises. See Rule 3.1001(b).

Sales of soft drinks and mixers from a mini bar are subject to the limited sales and
use tax, not the mixed beverage tax.

The following examples assume the banquet room is located in the hotel and the
hotel holds a mixed beverage permit:

Cashier Fee - sales tax or mixed beverage gross receipts tax is due,
depending on what is purchased (e.g., tickets for the bar is mixed beverage tax;
tickets for food is sales tax).
Bartender Fee - mixed beverage gross receipts tax is due, whether or not
the hotel supplies the alcoholic beverages (preparation and service of alcoholic
beverages).
Carving Fee - sales tax is due if the hotel charges for food (part of food
service).
Cover Charge - sales tax is due on the sale of an admission to an
amusement service if the event or location of the service is within the State of
Texas. See Rule 3.298. Cover charges may be subject to Mixed Beverage Tax
is the charge is in connection with a reduced price for drinks. (Happy Hour).
Table Set Up - sales tax if hotel charges for food (part of food service);
state hotel tax if food not provided (readying room for occupancy).
 Cleaning Charge - state hotel tax (readying room for occupancy; see Note
below).
Phone Rental or Set Up - subject to sales tax if the hotel charges for food
(part of food service); subject to state hotel tax if food not provided (for phone
rental, equipment furnished with hotel room; and for phone set up, readying
room for occupancy). If the hotel also charges for the phone's use, the rental/set
up fee becomes part of a telecommunications service subject to both sales
taxes and the telecommunications infrastructure assessment.
Margarita Machine Rental - mixed beverage gross receipts tax if hotel
sells or serves alcoholic beverages (preparation or service of alcoholic
beverages); sales tax if hotel charges for food and does not sell or serve
alcoholic beverages (part of food service); or state hotel tax if the hotel does
neither (equipment furnished with hotel room).
Ice Carving/Ice Sculpture - sales tax if hotel charges for food (part of food
service); state hotel tax if food not provided (item furnished with room).
Banner Hanging Charge - sales tax if hotel charges for food (part of food
service); state hotel tax if food not provided (readying room for occupancy).
Bar Set Up - mixed beverage gross receipts tax (preparation of alcoholic
beverages).

Note: Hotel tax is not due on banquet rooms located in a separate building
from the hotel (building with sleeping rooms). Sales taxes would be due on
these room charges if the hotel provides food. Sales taxes would also be due on
cleaning fees.

As mentioned above the hotel may be responsible for reporting Mixed Beverage
Tax, which is another tax that may be audited by the Comptroller of Public
Accounts auditor. An excerpt from the mixed beverage rule is shown below.

Mixed Beverage Tax - Rule 3.1001 subsection (c) provides in part as follows:

Taxable mixed beverage receipts. The Mixed Beverage Gross Receipts Tax applies
to, but is not limited to, receipts for the following items:

(1) receipts from the sale or service of alcoholic beverages;

(2) receipts from the sale or service of nonalcoholic beverages that
are mixed and consumed with alcoholic beverages on the
permittee's premises;

(3) receipts from cover charges, door charges, entry fees or

admission fees that are related to reduced prices for alcoholic
beverages as described in 16 TAC sec. 45.103 (relating to
Regulations of "Happy Hour"). If cover charges are determined
to be related to reduced prices for alcoholic beverages, the tax
base will be the entire receipts from the cover charge plus the
reduced sales or service prices received for the alcoholic
beverages.

(4) as an alternative to paragraph (3) of this subsection, a permittee

may elect to report the services or sales of alcoholic beverages at
the normal service or selling price and exclude the cover charges,
door charges, entry fees or admission fees from the tax base. The
normal sales or service price is the price charged for the alcoholic
beverage when no cover charge, door charge, entry fee, or
admission fee is collected. When the permittee elects to use this
option, the cover charges, door charges, entry fees, or admission
fees will be subject to sales tax under Sec. 3.298 of this title
(relating to Amusement Services);

(5) the normal selling price of alcoholic beverages served with meals
with no separate charge. If the specific alcoholic beverage is
being sold or served at a promotional price at the same time as
the meal, the tax base for the alcoholic beverage will be the
promotional price.

This subsection refers to promotions usually promoted as "free

drink(s) with a meal."
Exemptions from Hotel Occupancy Tax

These areas are discussed in greater detail in separate sections in this chapter. Not
all entities will qualify - the rules and statutes should be referenced. The exemption
granted for Hotel Occupancy Tax is more narrowly construed than for Sales and
Use Tax. Not all organizations that are exempt from sales tax are exempt from the
hotel occupancy tax. The organization claiming the exemption should apply to the
Comptroller's Office for this exempt status.

If an exemption applies, then the organization or individual claiming exemption

must present an exemption certificate to the hotel. Beginning October 1, 2003,
hotel owners and operators may accept, in good faith, hotel occupancy tax
exemption certificates when presented with documentation proscribed by the
Comptroller. See section of Hotel Occupancy Tax Rule 3.161 on Exemption
Certificates and Good Faith Acceptance for specifics.

Exemptions include:

Permanent Residents
Governmental Agencies
Charitable or Eleemosynary Organizations
Educational Organizations
Religious Organizations
Rentals by Private Clubs to members
College/University Dormitories
Specific Nonprofit Entities

Employees of exempt organizations are also exempt when traveling on official

business of the organization. The method of payment does affect the exemption.
Representatives claiming an exemption who are not employees of the organization
must pay with the organization's funds (organization check, credit card, or direct
billing to the organization).
NOTE: An exempt organization that operates a hotel will not be exempt from the
collection and reporting of the hotel occupancy tax.

Permanent Resident

A permanent resident is any person/occupant who has or shall have the right to
occupancy of any room or space in a hotel for at least 30 consecutive days without
interruption. A person may be an individual, organization, or entity. A permanent
resident is not subject to the Hotel Occupancy Tax.

A person becomes a permanent resident by either entering into an agreement to

occupy a room for 30 or more consecutive days or having actually occupied a
room for 30 consecutive days.

Guests who provide written notification that they will stay for at least 30
consecutive days are permanent residents from that day forward, as long as there is
no interruption in the right of occupancy for the next 30 days. Guests without a
written commitment do not become permanent residents until the 31st day,
and they owe the hotel occupancy tax on the first 30 days. Any interruption in
the right of occupancy voids the exemption. See Hotel Occupancy Tax Rule 3.161
(b)(6).

Permanent residents are not required to physically occupy a room or space.

Permanent residents may have the right to use or occupy different rooms in the
same hotel without loss of the permanent resident exemption.

Companies can be permanent residents. Business entities such as airlines and

railroads, may rent hotel rooms without having the same employee occupy the
same room during the 30 days. The company, not the person occupying the room,
is the renter. Therefore, the company may qualify as a permanent resident. A
company may enter into a written agreement to guarantee payment of a room for
30 consecutive days. It is not necessary that the same room be rented or occupied
so long as a room is rented for 30 consecutive days. Different individuals may use
the rooms without affecting the exemption, but there may be no interruption in the
right to occupy the rooms. To qualify for this exemption the specific number of
rooms needs to be stipulated. See example below.

NOTE: The moving of a hotel customer from one room to another has no effect
on the permanent resident status. The permanent resident exemption applies to only
the number of rooms specified in the agreement.

Example: An airline agrees to pay for six rooms for 180 consecutive days. On
days 42 through 56 the airline pays for ten rooms. The four additional rooms are
not exempt from hotel tax because they exceed the number of rooms specified in
the agreement and the rooms have not been rented for more than 30 consecutive
days.

Effective August 26, 1991, the permanent resident exemption is valid until there is
an interruption in payment, meaning there is a break in the right to use, possess, or
occupy a room or space in the hotel. After the interruption the guest must once
again qualify for the exemption.

Governmental Agencies

U.S. government agencies and its employees (including military personnel) are
exempt from state and local hotel occupancy taxes. State agencies and most state
employees are not exempt and must pay state and local hotel occupancy taxes.
Texas state agencies may request a refund of the hotel occupancy taxes paid.

Statutory exemption is available for certain Texas state officials that have been
issued a hotel occupancy tax exemption photo ID or card. These state officials,
judicial officers, heads of state agencies, the Executive Director of the Legislative
Council, the Secretary of the Senate, state legislators, legislative employees,
members of state boards and commissions, and designated state employees of the
State of Texas (who present a Hotel Occupancy Tax Exemption Photo
Identification Card when traveling on official state business) are exempt from both
state and local hotel occupancy taxes.

Exempt from state and local hotel occupancy taxes are:

Designated Texas state employees who have been issued a Hotel Tax
Exemption Photo Identification Card (If a state employee has not been issued
this Photo ID Card - they must pay the hotel tax to the hotel.) For the purpose
of claiming an exemption, a Hotel Tax Exemption Photo Identification Card
includes:
(A) any photo identification card issued by a state agency that states
"EXEMPT FROM HOTEL OCCUPANCY TAX, under Tax
Code, 156.103(d)", or similar wording; or

(B) a Hotel Tax Exemption Card that states "when presented with a
photo identification card issued by a Texas agency, the holder of
this card is exempt from state, municipal, and county hotel
occupancy tax, Tax Code, 156.103(d)", or similar wording.
The United States government and its employees traveling on official
business representing the United States government
Diplomatic personnel of a foreign government who present an appropriate
Tax Exemption Card issued by the United States Department of State

United States government agencies and their employees traveling on official

business are exempt from Texas and local hotel occupancy taxes. For example, the
National Pork Board (as an agency of the federal government) is exempt from the
state and local hotel occupancy taxes. Federal employees traveling on official
business for the federal government may issue a hotel occupancy tax exemption
certificate in the name of the exempt entity instead of paying the state and local
hotel occupancy taxes. Hotels may request that the employee show proof of
employment such as a government ID, business card, payroll receipt, etc.

Government contractors are not exempt from state and local hotel occupancy taxes.
This includes contractors that are reimbursed by a governmental agency.
Most State employees are not exempt from Hotel Occupancy Tax [Rule 3.161(b)].
For example, State police officers are state employees and, as such, should be
reimbursed by their agency when traveling on official business. The hotel tax paid
by the state or reimbursed to a state employee may be refunded as provided in Rule
3.163.

A State of Texas agency may request a refund of hotel occupancy taxes paid
directly to a hotel or reimbursed to employees from the agency on a state travel
voucher. Comptroller's Rule 3.163 provides the procedures for state agencies to
obtain refunds of hotel occupancy taxes.

On September 1, 2001, the state hotel tax refund claims were changed to be filed
on a fiscal year quarter instead of a calendar year quarter. A state agency may apply
for a refund of state hotel tax no later than two years after the end of the fiscal year
in which the travel occurred as provided by State of Texas Travel Allowance
Guide, sec. 1.17 and sec. 8.06. A state agency may apply for a refund of local hotel
occupancy taxes for each calendar quarter according to the local city or county
ordinance. In the absence of a local ordinance, the same time limitation that applies
to the refund of state hotel occupancy taxes will also apply to municipal, county
and sports and community venue hotel occupancy taxes.

The Texas Legislature does not provide hotel occupancy tax exemptions for city,
county, and state police officers. Federal police officers (while traveling on official
business) are exempt from state and local hotel taxes.

Police officers employed by Texas institutions of higher education may be exempt

from state hotel occupancy tax while on business trips, but must pay any local
hotel taxes imposed. A completed Hotel Occupancy Tax Exemption Certificate
should be furnished to the hotel when claiming an exemption. Beginning October
1, 2003, police officers from non-Texas institutions of higher education are no
longer exempt and must pay all hotel taxes. (See Educational Organizations)

NOTE: Exemptions for state hotel occupancy tax are different from the
exemptions for city, county and sports and community venue hotel occupancy
taxes. Local government officials are not exempt from paying the state and local
hotel occupancy taxes.
Exempt from city, county, and sports and community venue taxes:

Federal employees, foreign diplomatic personnel, and certain Texas state

employees (except for state college and university personnel who must pay the
local tax to the hotel and then be reimbursed by their institution.)

Not exempt from either state or local Taxes:

Local government personnel must pay all hotel occupancy taxes.

Charitable or Eleemosynary

This exemption is more narrowly construed than it is for sales tax exemptions.
Charitable organizations are nonprofit organizations that devote all or substantially
all of their activities to the alleviation of poverty, disease, pain, and suffering by
providing food, clothing, drugs, treatment, shelter, or psychological
counseling directly to indigent or similarly deserving members of society for little
or no charge (with its funds derived primarily from sources other than fees or
charges for its services).

If the organization engages in any substantial activity other than the activities
described in the preceding paragraph, it will not be considered as having been
organized for purely public charity, and therefore, will not qualify for exemption.
No part of the net earnings of the organization may inure to the benefit of any
private party or individual other than as reasonable compensation for services
rendered to the organization.

Organizations that have received a letter of exemption from the Comptroller as

charitable are exempt from the state hotel occupancy tax. These organizations must
still pay any applicable local hotel taxes.

Although some charitable organizations are not organized for profit and they do
perform services that are charitable in nature, many of these organizations do not
meet the requirements necessary for the exemption under the Hotel Occupancy Tax
law and statute. See Comptroller Rule 3.161 for definitions.
Some organizations that do not qualify for the exemption:

Fraternities
Sororities
Service Clubs
Lodges
Professional groups
Trade or business groups
Medical associations
Veterans groups
Chambers of Commerce
Professional associations
Business leagues
Information resource groups
Research organizations
Support groups
Home schools
Organizations that merely disseminate information by distributing
publications
Volunteer fire departments - while exempt from sales and use tax are not
provided a hotel occupancy tax exemption by the Texas Legislature. Members
will need to pay any hotel taxes imposed when traveling on official business of
the fire department.
Educational Organizations

A nonprofit organization or governmental entity whose activities are devoted solely

to systematic instruction, particularly in the commonly accepted arts, sciences, and
vocations, and has a regularly scheduled curriculum using the commonly accepted
methods of teaching, a faculty of qualified instructors, and an enrolled student
body or students in attendance at a place where the educational activities are
regularly conducted. An organization that has activities consisting solely of
presenting discussion groups, forums, panels, lectures, or other similar programs,
may qualify for exemption under this provision, if the presentations provide
instruction in the commonly accepted arts, sciences, and vocations.

The organization will not be considered for exemption under this provision if the
systematic instruction or educational classes are incidental to some other facet of
the organization's activities. No part of the net earnings of the organization may
inure to the benefit of any private party or individual other than as reasonable
compensation for services rendered to the organization.

Educational organizations include:

Independent school districts,

Public and private elementary and secondary schools,
Texas institutions of higher education (public and private colleges,
universities, junior colleges, and community colleges) as defined in Education
Code Section 61.003 (out-of-state institutions of higher education were exempt
from state hotel occupancy tax from September 1, 1959, through August 31,
1999, and from September 1, 2001, through September 30, 2003), and
Regional education service centers are also educational organizations for
hotel occupancy tax purposes.

The 76th Texas Legislature (1999) repealed the hotel occupancy tax exemption for
non-Texas institutions of higher education. Two years later in a bill intended to
make no substantive revisions to the statutes, the word "Texas" was omitted in the
definition and out-of-state institutions of higher education were exempt, again. The
78th Legislature (2003) put Texas back into the definition and currently only
Texas public and private universities, colleges, junior colleges, and community
colleges are exempt.

Summary of exemption for non-Texas institutions of higher education (state hotel

occupancy tax only):

September 1, 1959 through August 31, 1999 - exempt

September 1, 1999 through August 31, 2001 - not exempt
September 1, 2001 through September 30, 2003 - exempt
 October 1, 2003 through present - not exempt

Some examples of organizations that do not meet the requirements for exemption
under this definition are:

Professional associations
Business leagues
Information resource groups
Research organizations
Support groups
Home schools, and
Organizations that merely disseminate information by distributing printed
publications.

An organization that qualifies as an educational organization is a Girl Scout troop

(at the troop level only). Representatives of individual troops may issue a hotel
exemption certificate in the official name of the troop instead of paying the state
hotel occupancy tax. To claim the exemption non-employees cannot use their own
funds, but must pay with the organization's funds (check, credit card, or direct
billing). The Girl Scout general council does not qualify for the exemption.
(See STAR document 200210494L).

Additionally, each individual Camp Fire Boys and Girls club under the national
organization is further recognized as an educational organization and entitled to an
exemption from the state portion of the hotel occupancy tax. This exemption only
applies to the individual boys and girls clubs and does not extend to the national
organization or any other subordinate organizations. (STAR document
200109470L).

Police officers employed by Texas institutions of higher education (while traveling

on official business) are exempt from state hotel occupancy tax, but must pay any
local hotel taxes imposed. For officers from non-Texas institutions of higher
education, see summary of exemption for non-Texas institutions of higher
education above.
Specific Non-Profit Entities

Some non-profit entities are exempt by law other than the hotel occupancy tax
statutes. The qualifying entity must have a letter of hotel tax exemption issued by
the Comptroller's office. Entity employees traveling on official business are
exempt from state and local hotel occupancy taxes.

Examples include certain non-profit electric cooperatives, non-profit telephone

cooperatives, non-profit housing authorities, housing finance corporations, public
facility corporations, health facilities development corporations, and cultural
education facilities finance corporations.

The reason for exemption should be written on the exemption certificate. For
example, "exempt per Electric Cooperative Act, Utilities Code, Chapter 161" or
"exempt per Telephone Cooperative Act, utilities Code, Chapter 162."

CHAPTER 3

TAXPAYER RECORDS

INTRODUCTION
This chapter explains the terminology and methods of record
keeping most common to the hotel industry.

Registration Card
A guest registers his/her name and address on this card. The card
will indicate the room number, room rate and date of registration.
The card usually bears a folio number.
Guest Folio
In addition to the information on the registration card, the folio
shows the itemized charges accrued by the guest by date and
department. The serial (folio) number should correspond with that
shown on the registration card. The guest folio may be arranged
in various forms, such as:
Two separate copies (one for guest and hotel).
Original and carbon (one copy for the guest; the other for
the hotel).
The guest folio and registration card may be arranged as
one form, in duplicate (one copy for the guest; the other for
the hotel).
Room Revenue Balance Sheet

The Room Revenue Balance Sheet is prepared daily. This report

records the room number, the occupant's last name and the
number of occupants per room. An example of a Room Revenue
Balance Sheet follows.

Daily Control Report

This report is used to balance the total room sales. The key totals
are usually printed on this report from the posting machine. The
night auditor reconciles the report, and amounts in the
adjustments column could indicate:
An entry error on the register
An adjustment for tax-exempt transactions
A sale rung up on an incorrect key

Daily Report
The night auditor of a hotel summarizes the total receipts for each
day on a daily report. This report includes:
Room rentals
Banquet room rentals
Food sales
Beverage sales
Gift shop sales
Telephone charges
Vending machine sales
Other miscellaneous sales or services
The daily report may also include:
Room and food statistics, such as:
o Number of rooms occupied - single
o Number of rooms occupied - double
o Number of complimentary rooms
o Average daily rate
o Number of breakfast, lunch and dinner covers
Sales tax payable.
Hotel Occupancy Tax payable.
Cash account and credit card accounts
Housekeeper's Report

This report is prepared the following morning on the basis of the

maids' reports and inspection of the rooms by the housekeeper
and her assistants. The information as to occupancy and baggage
in the rooms is summarized on the report. The printed form of the
report contains a list of all room numbers, with a small blank
space after each to show the status of each room by means of
symbols. In most cases the following symbols give sufficient
information:
"/" means occupied, baggage in room.
"X" means occupied, no baggage.
"B" means baggage, room not occupied.
"O" means room out-of-order
"Occupied" refers to overnight occupancy and it means that
someone slept in the room.
 CHAPTER 4

AUDIT PROCEDURES

INTRODUCTION

This section discusses audit procedures for hotel tax audits. The actual procedures
employed will depend on the records available. The auditor should utilize all
available records and worksheets and computer data of the taxpayer. Computer
records are considered books and records and may be requested by the auditor if
considered necessary to conduct the audit.

Tests should be made in accordance with generally accepted auditing procedures.

The auditor will schedule exceptions noted and be prepared to discuss these
exceptions with the taxpayer.

Pre-Audit Research

After the audit assignment has been received, certain information concerning the
taxpayer's account and the business should be obtained through pre-audit research
before an initial contact is made with the taxpayer.

Pre-audit research includes reviewing the following:

Taxpayer's response to the Audit Questionnaire

 Computer Terminal Inquiry (Refer to Appendix A)
History
Prior audit

Refer to the hotel checklist in this chapter for additional detail on pre-audit
research.

History Analysis

The history should be reviewed and analyzed before contacting the taxpayer.
Compare the taxable receipts reported for each period and note significant
variances. The significant variances might indicate:

Over-reported taxable receipts

Under-reported taxable receipts
Seasonal business
Out-of-business for part of a period

The capacity for each outlet should be reviewed to determine if reasonable receipts
are reported.

Refer to Appendix A for details of the data on the history.

Entrance Conference

The entrance conference should include a discussion of the following:

The taxpayer's interpretation of Hotel Occupancy Tax

The taxpayer's business operations
The taxpayer's accounting system
The taxpayer's reporting procedure
The taxpayer's clientele
Outlet data from the taxpayer's history should also be verified in the entrance
conference to determine if any file maintenance is necessary. Refer to the checklist
for a list of the questions to ask the taxpayer.

Visual Inspection

A tour of the premises should be made prior to beginning the examination of the
audit records. Look for:

The location of meeting and banquet rooms and facilities

Evidence of new construction or remodeling
The number of rooms in the hotel as compared to the capacity shown on the
history
Vending machines (e.g., soft drink machines, etc.)
Other sales or services offered to clientele

Examination of Gross Receipts

Total room receipts must be examined and verified by the auditor. The comparison
of total room receipts per the taxpayer's records and reported taxable room receipts
should indicate:

If the taxpayer had deducted any sales, and

If taxable receipts were reported correctly.

Total room receipts should be reconciled for the entire audit period. Total room
receipts should be reconciled with the general ledger and/or income tax return.
Usually, a separate account is set-up for banquet room receipts.

Meeting and banquet receipts from the general ledger should be combined with the
room receipts from the general ledger and compared with the reported total room
receipts and the reported taxable receipts shown on the taxpayer history.
Differences may be a result of:

Bad debts
Exempt sales - taxpayer only reports taxable receipts
Banquet room receipts not being reported
Computation errors
Posting errors
Bar receipts included in total receipts
Restaurant receipts included in total receipts
Gift shop receipts included in total receipts
Vending machine income included in total receipts
Tax collected included in total receipts

The differences from the reconciliation with the general ledger and/or income tax
return should be analyzed to determine if further examination of records is
necessary. If there are some unexplained differences, then discuss the differences
found with the taxpayer. Many of the differences found in the reconciliation may
be of no consequence to Hotel Occupancy Tax. The taxpayer may be able to
readily explain the differences. The auditor can then verify the taxpayer's
explanation rather than spending unnecessary time searching for the nature of the
differences.

Reconciliation of Tax Collected to Tax Reported

Analyze the records to determine if there are separate accounts for the different
types of taxes collected by the hotel (sales, hotel, mixed beverage taxes). If there
are separate accounts, then analyze the Hotel Occupancy Tax account to determine
if both state and local taxes are included in the same account. If local tax is
included, then the local rate should be determined and the amount separated. If
there are not separate accounts for the different types of taxes collected, review the
Monthly Summary for the Hotel Occupancy Tax collected. The reconciliation of
state hotel tax collected to tax reported will be done for every report period in the
audit period. Any exceptions noted in this reconciliation should be scheduled and
discussed with the taxpayer.

Reconcile the state tax per taxpayer's records with the reported amount of tax for
the entire audit period. The differences may include:

Posting errors in the general ledger

Non-posting of tax paid
Tax reported but not collected
Tax collected but not reported

The extent to which the Monthly Summary and the Daily Reports are examined
will depend on the analysis and review of the:

Taxpayer's history
Visual inspection of premises for additional taxable receipts
Material errors found in the reconciliation of gross receipts
Material errors found in the reconciliation of the tax accrual account

The taxes collected should be scrutinized in detail for all report periods. Anomalies
or periods with large under-reporting should be examined to determine the cause of
the under-reporting.

If the additional taxes assessed in the audit are greater than 25% of the taxes
reported (this is based on a calculation done on a report period basis -not a total
calculation) additional procedures may need to be employed. For example, the
expansion of the audit period (to earlier periods than originally planned), may be
necessary. An under reporting by 25% or more qualifies as an exception to the
statute of limitations. Therefore, the audit period may end up covering more than
the standard four year period. If this is the case Audit Headquarters personnel
should be contacted to obtain written permission to expand the audit period beyond
the statute of limitations. Additional penalty may be assessed on the audit
adjustments if the taxpayer intentionally under-reported their tax liability to the
State or if the audited taxes exceed reported amounts by 25% or more.
Reconciliation of Monthly Summary to General Ledger

The Monthly Summaries should be totaled on a quarterly or yearly basis and

compared to the reconciliation of gross receipts. The purpose of this procedure is to
check internal control and to verify that no posting errors went undetected.

NOTE: A formal schedule is not necessary. If differences are noted during the
reconciliation then a schedule should be prepared to document any inconsistencies.

A review of the Monthly Summaries may indicate why there is a difference in the
reconciliation of receipts. If there is an unexplained difference in the receipts
reconciliation, then the Monthly Summaries can be used to narrow the time period
in which the differences occurred. The results can indicate the procedures to use to
reconcile the daily reports.

Reconciliation of Daily Reports to Monthly Summary

The type and materiality of the differences noted in the reconciliation of the
Monthly Summaries to the taxpayer's records will determine the size and type of
sample required for daily reports.

The sample may be random or it may cover a specific time period.

Random sampling should be used when the differences are distributed over the
entire audit period or when it is desirable to test internal control procedures.

After the sample has been chosen, the daily reports should be compared to the
monthly reports to verify posting of the accounts. The daily reports may also be
compared to the daily revenue balance sheet to detect errors that were not detected
in the taxpayer's accounting system.

For more information regarding sampling procedures, refer to the Audit Division
manual, Audit Sampling - Training and Development Course.
Reconciliation of Daily Report to Folios

A reconciliation of the daily report to the taxpayer's folios is not necessary to verify
gross receipts unless the taxpayer's internal control is nonexistent or ineffective.

NOTE: This procedure will more commonly be used to verify non-taxable room
receipts.

Alternative Records

If records are not available or insufficient, then the following may be used:

City Hotel returns

Bank statements
Estimated deficiency

The taxpayer's City Hotel returns may be used to compare state amount reported;
however, since this is an internal report it may not be reliable. The taxpayer's bank
statement may also be used to obtain gross taxable receipts by adding the deposits
for each period. When bank statements are used, an allowance should be made for
deposits verified as non-receipts such as loans.

If records are not available, then the taxpayer's return must be estimated. To
establish an estimate, use room capacity and average room charge.

Deductions

The non-taxable room receipts that a taxpayer may claim are:

Bad debts
Permanent residents
 Exempt organizations.

The nature of these non-taxable room receipts and the procedures used to verify
them will be discussed in this portion of the chapter.

Bad Debts

The Hotel Occupancy Tax Return does not allow for the deduction of bad debts;
even so, it is the policy of the Comptroller's office to allow the deduction. If a
taxpayer has not taken a deduction for a bad debt(s), then a credit should be
allowed.

Bad debts are allowed when they are written off the taxpayer's Federal Income Tax
Return or when past history indicates that the debt recorded in the general ledger
will be written off on the Federal Income Tax Return.

The audit procedure used should verify that the bad debt deduction is valid. The
procedure should consist of checking the taxpayer records to determine if there is
an account related to bad debts. If there is not a bad debt account, determine how
bad debts are handled by the taxpayer.

If there is a bad debt account, analyze the account to determine if the bad debt(s)
related to hotel receipts can be separated into taxable and nontaxable groups. If a
large number of the customers are exempt or permanent residents, the hotel bad
debt account must be further analyzed to determine which debts specifically relate
to customers that were charged hotel tax. Only the bad debts that were originally
treated as a taxed transaction should be written off as a bad debt (for State tax
purposes).

The taxpayer records should be examined for recoveries of bad debt(s) which have
previously been written off and not subsequently reported. If this is the case the
hotel tax should be reported in the period it is recovered.

The State does not allow Credit interest for bad debts. Any refunds due to bad
debts should be scheduled on a separate exam so that credit interest can be waived
on that particular exam. A footnote needs to be added that this exam contains bad
debts and no credit interest will be granted on bad debts.

Audits on Residential or Semi-Residential Hotels

For a residential or semi-residential hotel, two revenue accounts are usually kept
for clientele: one for clientele designated as transient and another for permanent
clientele. The revenue accounts will normally be traceable to a monthly receipts
journal that summarizes the receipts of each day.

A residential and semi-residential hotel will normally have either a revenue card by
room or a Monthly Summary Report instead of a daily revenue balance sheet that
should show:

The check-in date

The occupant of the room
The period of payment
The base rate, and
Possibly the check out date

(An example of a Monthly Summary Report is in Chapter 3.)

The frequency of payment (i.e., weekly, semi-monthly or monthly) would indicate

the probability of a resident staying less than 30 days. A client paying monthly is
more likely to stay more than 30 days.

If monthly summaries are nonexistent or inadequate, then the deposit agreement

should be examined. The deposit agreement normally will show the date of
occupancy and vacancy.

Initially, the deposit agreement may be sampled to determine if the number of

clientele who remain less than 30 days is significant. If this test indicates that a
significant number of the hotel's clientele stay less than 30 days, then the auditor
should trace the number of clientele who remained less than 30 days to:

The room revenue balance sheets, and

Use the average room rate times the length of occupancy.

If these records are not available for residential or semi-residential hotels, then
examination of the customer's folios may be required.

Audits on Transient Hotels

Permanent residents are rare in transient hotels; therefore, the taxpayer does not
usually keep detail summary records for transient hotels. Information regarding
permanent residents may be taken from the Room Revenue Sheet or the folio.

The Room Revenue Sheets will show the customer's name and hotel room number.
The auditor may obtain these for the period that the exemption was claimed to
determine if the customer stayed for 30 consecutive days.

If the Room Revenue Balance Sheet is inadequate or unavailable, then the folios
must be examined.

NOTE: Extensive examination of folios should not be necessary unless there are
no Summary records through which differences can be specifically identified.

Folios are usually filed by the date of the last charges. Therefore, folios can be
randomly sampled by days. The folios will show the date of arrival and the date of
departure for determining if a customer qualifies as a permanent resident. The
registration card may indicate the client's expected length of stay. It may be
necessary to examine the registration cards to determine if the first 30 days are
exempt.

A transient hotel may claim a substantial amount of deductions if it caters to

companies such as railroads or airlines. These companies reserve rooms for their
personnel. The number of rooms contracted or paid for are usually not the same
each day. Refer to Chapter 2 for treatment of permanent residents.
The records necessary to determine the minimum number of rooms rented include
the:

City ledger (billing)

Daily revenue balance sheet
Folios

Sampling auditing techniques may be used if the records are numerous or

unavailable.

Exempt Organizations

Some organizations that contract and pay the hotel directly for rooms are exempt
from Hotel Occupancy Tax. Refer to Chapter 2 for the definition and policies
regarding exempt organizations. Some organizations exempt from sales tax ARE
NOT exempt from paying hotel occupancy tax. These organizations may contract
for a banquet or meeting room within a hotel as well as for room rentals; both need
to be verified. When an exempt organization contracts and pays for a room, the
taxpayer should obtain a Hotel Occupancy Tax Exemption Certificate. (Refer to
Hotel Occupancy Tax Rule 3.161.)

Non-taxable room rentals must be verified. To determine if these non-taxable room

rentals are valid a sample may be taken. The size and nature of the sample would
depend on the materiality of the exemptions claimed and the summary records
available for verification of the exemptions. If a material error is found, then the
sample period may be expanded.

Some hotels may summarize the exemptions claimed on a monthly or daily report.
Additional sources of verification are:

City ledger (billing), and

Texas Hotel Occupancy Tax Exemption Certificates

The folios may need to be examined if there are no summary records. Some
taxpayers may attach the exemption certificates to the folios.
 CHAPTER 5

AUDIT WRITE-UP

INTRODUCTION
The result of an audit will be either a deficiency (tax is due to the
state) a credit audit (taxes are due to the taxpayer) or a no tax
change audit. A no tax change means that the reported amounts
were correct and no audit adjustments are required. The write up
procedures are different depending on the audit results.
The write up of a hotel audit is considered a manual audit write up
as opposed to a sales tax audit (an uploaded audit) which is an
automated tax. Since the hotel tax is not automated on the
system the actual tax amounts need to be calculated by the
auditor on excel schedules. These schedules are discussed later in
this chapter.
Deficiency Audit
A deficiency audit will be an audit that results in the taxpayer
owing additional hotel tax to the State of Texas. This could be the
result of exemptions that were claimed but were unsupported by
exemption certificates. The hotel could have claimed deductions
for permanent residents that did not meet the statutory
qualifications of permanent residents. The taxpayer has the right
to disagree with the audit results if they feel the audit is not
accurate in its assessment.

Credit Audit
A credit audit may arise from one of the following:
Posting error by the taxpayer
Receipt of Exemption Certificates
Charging tax to a permanent resident in error
Bad Debts
If a credit arises from tax collected in error from a customer, then
the credit should not be given to the hotel until it has been
refunded to the customer.
Before the refund is given to the hotel, the auditor must verify by
one of the following procedures that the hotel has refunded the
money to its customer.
The auditor may verify a canceled check from the hotel paid
to the customer for the refund of taxes.
If the customer still does business with the hotel, then the
auditor may verify the posting of a credit memo to the
customer's account.
Credit interest will accrue on reporting periods due on or after
January 1, 2000. Credit interest will not accrue on the refund
amounts until after the hotel refunds the tax to the customer or
applies the refund to the customer's account via a credit memo.
NOTE: Credit interest does not accrue on bad debts.
Audit Procedure:
Entry dates for the audit may or may not always coincide
with the original transaction date. Footnotes should explain
the original date of the transaction and the specifics
regarding the entry. If a refund is due the hotel - credit
interest will not apply until the date the hotel refunded the
tax to the customer or credit has been given. In this instance
dates may need to be altered for entry to the audit exam or
an interest restart date may be given to an entire exam to
process the correct beginning date for interest calculations.

No Tax Change Audit

When an audit examination results in no adjustments, then a No
Tax Change audit should be prepared. Refer to the Auditing
Fundamentals Manual for specifics.
Amended Audits
An amended audit is an adjustment to a completed audit. Refer to
the Auditing Fundamentals Manual for write-up procedures for
an amended audit.
Schedules and Forms
Audit write-up includes completion of the following:
Record of Audit Planning, Activities, and Results
Exhibits (i.e., room agreements, monthly summaries, etc)
Exams (schedules) and Supplemental Exams (supporting
schedules)
Index to Working Papers (Template)
Audit Adjustment Report (Form)
Tax Adjustment Summary (Auditor generated Exam)
Audit Cover Letter (Template)
Audit Report (Template)

REFERENCE
WEBLIOGRPHY

WWW.GOOGLE.COM
WINDOW ON STATE GOVERNMENT
www.audit of hotel procedure
www.audit report

PROJECT REPORT
 ON

AUDIT OF HOTEL

MASTERS OF COMMERCE DEGREE

SEMESTER-

ACADEMIC YEAR: 2016-17

SUBMITTED BY
MR: NAIDU VENKATESH BALARAM
ROLL NO: 28

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

PROJECT REPORT ON
AUDIT OF HOTEL
 MASTERS OF COMMERCE DEGREE

SEMESTER- 3

ACADEMIC YEAR: 2016-17

SUBMITTED BY
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF
MASTER DEGREE OF COMMERCE
MR: NAIDU VENKATESH BALARAM
ROLL NO: 28

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078
 N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE
AND COMMERCE,
N.E.S. MARG, BHANDUP (WEST), MUMBAI- 400078

CERTIFICATE

This is to certify that the project report on AUDIT OF HOTEL is bonafide

record of project work done by MR. NAIDU VENKATESH BALARAM
submitted in partial fulfillment of the requirement of the award of the Master of
Commerce Degree University of Mumbai during the period of his study in the
academic year 2016-17

INTERNAL EXAMINER:

EXTERNAL EXAMINER:

Principal
Mrs. Rina Saha
 DECLARATION

I hereby declare that this Project Report entitled AUDIT OF

HOTELsubmitted by me for the award of Masters of Commerce
Degree; University of Mumbai is a record of Project work done by me
during the year 2015-16. This is entirely my own work.

NAME: NAIDU VENKATESH BALARAM ROLL NO: 28

Place: Mumbai, Bhandup (W)

Date:

Signature:

ACKNOWLEDGEMENT
 I owe a great many thanks to great many people who helped and supported
me doing the writing of this book.

My deepest thanks to lecturer, Prof. ASIF BAIf the project for guiding and
correcting various documents of mine with attention and care. He has taken pains
to go through my project and make necessary corrections as and when needed.

I extend my thanks to the principal of NES Ratnam College of Arts Science

and Commerce, Bhandup (w), for extending her support.

My deep sense of gratitude to Principal Mrs. Rina Saha of NES Ratnam

College of Art, Science and Commerce for support and guidance. Thanks and
appreciation to the helpful people at NES Ratnam College of Arts, Science and
Commerce , for their support.

I would also thank my institution and faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to my
family and well-wishers.

Candidate Name: ODIYAR SUMANRAJ